The Prohibitions

Prohibitions

Exclusive dealing refers to any agreement, written or otherwise, between a supplier or manufacturer and its customer-wholesaler or retailer-whereby the customer is restrained from dealing with any of the supplier's competitors. Exclusive deals raise competition concerns as they may foreclose the market to existing and potential competitors. Such agreements may be prohibited under Section 17, Section 20 and Section 33 of the Act.

The term "exclusive dealing" includes all agreements that, directly or indirectly, lead to an exclusionary effect on competitors. If, for example, a supplier offers discounts based on the proportion of the wholesalers' sales that come from that supplier (these are commonly known as fidelity or loyalty discounts), the wholesaler may have no incentive to source from other suppliers. This could lead to a de facto exclusive arrangement that forecloses the market to competitors.

Under certain circumstances, however, exclusive arrangements may have pro-competitive benefits in that they may promote non-price competition and improvement in quality of service. Exclusive arrangements could, for example, be necessary to eliminate free-rider problems. Free riding may occur when one distributor benefits from the promotional efforts of another distributor. This reduces the incentives for the distributor to invest in promotional activities, as he would not be able to reap all the benefits of his efforts. Exclusive arrangements can overcome this free-riding problem by retaining the incentives to invest, such that the pro-competitive benefits are realized. Exclusive dealing may also be beneficial where a supplier must undertake highly specific capital investments to meet the particular requirements of a customer. If the equipment cannot be used for any other purpose, the supplier bears the risk of having made a useless investment if the customer switches to another supplier. In the absence of exclusivity, the investment might not be undertaken.

In such cases where the arrangement leads to pro-competitve benefits such that it contributes to the improvement of production or distribution of goods and services or the promotion of technical and economic progress, the arrangement will not be prohibited under the Act. Temporary exclusive arrangements may also be permitted under Section 33 of the Act to allow a new entrant to penetrate the market.

Price discrimination may be prohibited under Sections 17 and 20 of the Act. It refers to the application of different conditions, normally different prices, to equivalent transactions. It can take two forms:

The charging of different prices to different customers, or categories of customers, for the same product where the differences in prices do not reflect the quantity, quality or any other characteristics of the items supplied; or

The charging of the same price to different customers, or categories of customers, even though the costs of supplying the product were very different. A policy of uniform delivered prices throughout the country could be discriminatory if, for example, differences in transport costs were significant.

Tied selling is the practice by which a supplier obliges its customers to obtain goods or services from it or its affiliates, as a condition for obtaining another good or service that is, by its nature and according to commercial usage, unrelated to the first good or service. This type of practice may be prohibited under Sections 17, 20 and 33 of the Act.

An example of tied selling can be found where a bank makes it, as a condition of getting a loan, compulsory for a customer to purchase other products such as investment services from the bank. Manufacturers of electronic goods may also require consumers to purchase peripheral equipment or services in order to keep their warranty for a certain product valid, i.e., the product must not be used along with other products apart from the manufacturer's. This also amounts to tied selling. Note that tied selling could be achieved through direct or indirect means. Direct tied selling occurs where the supplier imposes an explicit obligation on the customer to purchase the two unrelated products, and refuses to supply the products separately.

Indirect methods of tied selling include tactics such as offering a substantial discount for the joint purchase of the two products such that the customer has no incentive to purchase the products separately.

Under the Act an enterprise is deemed to be dominant in a market if by itself or together with an interconnected company, it occupies such a position of economic strength as will enable it to operate in the market without effective constraints from its competitors or potential competitors. Being dominant is, in itself, not a breach of the Act, but when an enterprise abuses its dominant position, it breaches Sections 20 and 21 of the Act. Examples of abusive behavior include restricting the entry of any business or person into a market; imposing unfair buying or selling prices; and granting of preferential treatment to some customers over others.

Perhaps the most obvious form of abuse of dominant position is where the enterprise concerned charges excessively high selling prices or extracts excessively low buying prices. An "excessive price", in this instance, may be defined as a price that has no reasonable relation to the economic value of a product or service. Prices in a particular market can be regarded as excessive if they allow the dominant firm to sustain profits that are appreciably higher than it could expect to earn in a competitive market. A determination of excessively high selling prices, for example, would take into consideration both operating and capital expenditure, including an allowance for a reasonable rate of return to investors, shareholders and lenders of the business. Other factors that may be taken into account in an assessment of excessive pricing would be the prices of similar competing products or the price at which the same product is being sold in another market, for example, the export market as compared to the domestic market.

Predatory pricing occurs when a dominant firm temporarily charges particularly low prices in an attempt to eliminate existing competitors. The predator will incur temporary losses during its low pricing policy with the intention of raising prices in the future to recoup losses and gain further profits. Such behaviour may offer consumers advantages in the short run but will be disadvantageous in the end, as it will ultimately reduce competition. It is prohibited under Section 20 of the Act.

Dominant firms may also engage in predation in order to discipline competitors who have undertaken to challenge the market power of the dominant firm. The intent of disciplinary actions is to convince the target of the actions to cease a particular practice rather than to eliminate or exclude the competitor from the market. The net result on competition can be the same as elimination of a rival, if the disciplining results in the elimination of the competitive threat of the target.

Predatory pricing necessarily involves the ability to raise prices once rivals have been disciplined or have exited the market. Consequently, a key consideration in determining that low prices are in fact predatory and may lead to a substantial lessening of competition is whether the market is characterized by high barriers to entry. Without such barriers, any post-predation price increase by the dominant firm would simply attract entry so that the dominant firm would not be able to raise prices and recoup the costs of predation.

It is difficult to distinguish predatory pricing from competitive pricing since both, at least initially, involve lower prices. Predatory pricing is often described as selling at a price below some measure of cost. A price below marginal or average variable cost provides a sufficient condition for concluding that there is predatory behaviour. It is not, however, a necessary condition. A firm can engage in predation without dropping prices below average variable or marginal cost, particularly if it already has in place excess capacity. Hence, where price is found to be above marginal and variable cost but below average total cost and the alleged predator is dominant, predation may be a feasible strategy.

This is the practice whereby a supplier refuses to supply goods to a dealer. Activities that amount to refusal to supply without reasonable justification may be prohibited under Section 17 and Section 20 of the Act.

A supplier may refuse to supply for various reasons, for example to control the retail prices at which its products are sold or to protect its downstream markets. A situation may arise in which a supplier recommends resale prices to its dealers and refuses to supply those dealers who do not resell at these prices. A dominant enterprise that controls an essential resource or facility may also attempt to protect its downstream business by refusing to supply the resource to competing downstream enterprises.

A dominant telecommunications carrier, for example, may, in the absence of competition law, favour its own internet service business by refusing to allow wholesale access to its network to competing internet providers. Anti-competitive effects may also arise when a supplier refuses to supply to a dealer unless the dealer agrees to an exclusive arrangement.

An essential facility may be defined as a facility or infrastructure, without access to which competitors cannot provide services to their customers. An essential facility may exist either at the manufacturing (upstream) or distribution (downstream) level. Examples of essential facilities include technical information, transport infrastructure (e.g., rail, port or airport) and pipelines/wire for the supply of water, gas, electricity or telecommunications services.

The problem arises when one firm is active in both upstream and downstream activities (it is vertically integrated) and refuses to grant other firms who wish to provide either upstream or downstream services only, access to the "facility". The refusal to supply may be anti-competitive if it prevents third party firms from entering the market and consequently has the effect of lessening competition. A dominant firm which controls access to an essential facility may be abusing its dominant position if it refuses access to the facility without reasonable justification or grants access only on discriminatory terms such that its competitors in the related market are disadvantaged.

An assessment of the "essential facilities" argument must carefully identify whether a facility is indeed essential. It must be established that access to the facility is indeed necessary for third party firms. If there are viable alternatives to that facility or if it can be easily replicated, then it would not be considered essential. The mere fact that a competitor is disadvantaged by not having access to the facility is not sufficient. Any assessment must consider the static (short run) implications of compulsory access to a facility against the dynamic (long run) effects on firms' incentives to invest and innovate.

The offering of discounts to customers is generally a form of price competition that is encouraged. Under certain circumstances, however, discounts can be anti-competitive, for example, if they lead to prices being set at predatory levels; are conditional on customers buying all or a large proportion of their goods from the dominant enterprise (commonly known as "fidelity" or "loyalty" discounts); or where they are conditional upon the purchase of tied products (tying or bundling). If these conditions apply, the discount may be a breach of Section 17 or Section 20 of the Act.

Collective resale price maintenance is prohibited under Sections 17, 22, 23 and 24 of the Act. Resale price maintenance (RPM) by individual enterprises is prohibited under sections 17, 20, 25 and 27. Under Sections 22, 23, 24, 25 and 27, RPM is a "per se" breach of the Act. This means that the fact that RPM is practised is sufficient evidence that a breach has occurred and there is no need to assess and prove the negative impact on competition.

There are many ways in which prices can be fixed. It may involve fixing the components of a price, setting a minimum price below which prices are not to be reduced, establishing the amount or percentage by which prices are to be increased, or establishing a range outside which prices are not to move. The prohibitions extend to agreements that affect the price to be charged only indirectly. Indirect means of resale price maintenance include discounts or allowances, transport charges, payments for additional services, the terms of guarantees or credit terms. While resale price maintenance is a practice that is often associated with suppliers, it is also unlawful for dealers to collectively agree to withhold orders from suppliers who refuse to impose minimum resale prices on other dealers.

Agreements to share markets may be, for example, by territory, type or size of customer. Such an agreement may lead to a substantial lessening of competition and may be prohibited under Section 17 of the Act. The agreement need not be explicit; discounts and other incentive structures that lead to market dis-aggregation would also be prohibited. If the agreement is found to be part of a cartel, then it is also prohibited under Section 35 of the Act.

There can be agreements, however, which have the effect of sharing the market to some degree but where that effect is no more than a consequence of the main object of the agreement. Parties may agree, for example, to specialize in the manufacture of certain products in a range, or of certain components of a product, in order to be able to produce in longer runs and therefore more efficiently. Such an agreement may be caught by the Section 17 prohibition if there is, or is likely to be, an appreciable effect on competition. If, however, there are technical efficiencies arising out of the agreement such that the criteria under Section 17(4) are met, the agreement will not be prohibited. There are, however, no exemptions for cartel agreements under Section 35.

Agreements between bidders for a job or commodities contract, to arrange the bids before they are submitted, or for some bidders to refrain from bidding would be considered as bid-rigging and are prohibited under Section 36 of the Act.

Any agreement that allows two or more potential competitors to share markets, fix prices, limit production or facilities for transporting, storing or dealing in goods and services constitutes a cartel (conspiracy) and is prohibited under Section 35 of the Act. In effect, a cartel is any arrangement that allows competitors to behave as if they were a single enterprise instead of competitors. Cartelization is considered one of the most serious offences under competition law.

Generally, the more information made publicly available to market participants, the more effective competition is likely to be. In the normal course of business, enterprises exchange information on a variety of matters legitimately and with no risk to the competitive process. Indeed, competition may benefit from the sharing of information, for example, on new technologies or market opportunities.

The exchange of information may however lead to a lessening of competition where it serves to remove any uncertainties in the market and therefore eliminate any competition between enterprises. In such cases, the exchange of information is prohibited under Section 17 of the Act. It does not matter that the information could have been obtained from other sources. Whether or not the information exchange substantially lessens competition will depend on the circumstances of each individual case: the market characteristics, the type of information and the way in which it is exchanged. As a general rule, information-sharing is more likely to have a significant effect on competition the smaller the number of enterprises operating in the market, the more frequent the exchange and the more current, sensitive and confidential the nature of the information that is exchanged. If the information exchange is part of a cartel agreement, it would also fall under Section 35 of the Act.

Market restriction refers to the practice by which a supplier, as a condition of supplying goods to a customer, requires that customer to supply these or any other goods, for example, in a prescribed market. This practice leads to a restriction of intra-brand (same brand) competition and may be prohibited under Section 17, Section 20 and Section 33 of the Act. An example of a situation in which market restriction may occur is where a supplier offers dealership contracts only in defined areas so that each dealer has control over particular areas and as such does not compete with other dealers. In effect each dealer acquires a monopoly status in its defined area.

Market restriction may, however, be permitted under Section 33 of the Act if it is found to be temporary and/or it is practised between interconnected companies.

An agreement between buyers to fix (directly or indirectly) the price that they are prepared to pay, or to purchase only through agreed arrangements, limits competition between them. An example of the type of agreement, which might be made between purchasers, is an agreement as to those with whom they will deal. Such an arrangement may be caught by Section 17 of the Act if it has or is likely to have the effect of substantially lessening competition.

The same issues potentially arise in agreements between sellers, in particular, where sellers agree to boycott certain customers. This type of agreement may have and lead to a substantial lessening of competition.

Misleading advertising refers to any false or misleading representation that is made to the public by a person in the course of business. The representation may be about the nature, character or performance of a product, such as size, type of contents or weight. It also includes warranties, statements, or guarantees that are not based on adequate and proper tests. Misleading advertising is prohibited under Section 37 of the Act, which requires that advertisements be clear and unambiguous.

All methods of making representations, including printed or broadcast advertisements, written or oral representations, audio-visual promotions and illustrations, are covered by the prohibition. The Act refers to representations made "to the public." A representation to just one person can constitute a representation to the public. It should also be noted that it is not necessary to prove that any person was in fact misled; all that is required is that the representation is capable of misleading.

The Act proscribes "misleading in a material respect." "Material" does not refer to the value of the product to the purchaser but, rather, the degree to which the purchaser is affected by the representation in deciding whether to purchase the product. A representation is considered to be material if it leads a person to a course of conduct that, on the basis of the representation, he or she believes to be advantageous.

A clear example of misleading advertising is an advertisement which describes a pair of shoes which was "Made in Taiwan" as "English Handmade". Through the use of an expression associated with a long history of quality shoes, the merchant had made a misrepresentation as to the type of shoe that was being sold. Another example of misleading advertising occurs when a merchant makes a promise to a consumer to deliver an item in a certain number of days and does not fulfil this promise.

Failure to disclose information which is material to the consumer's purchasing decision will also amount to misleading advertising. A merchant's refund policy, for example, is deemed to be material information and therefore a merchant who fails to disclose his refund policy before a consumer makes his purchase is in breach of Section 37(1)(a) of the Act.

The FTC recommends therefore, that all merchants display their refund policy prominently in their business places. It is not enough that the said policy might be endorsed on the receipt that customer receives, because by the time the customer receives the receipt, the purchase would have already been completed.

A warranty is an undertaking given to a purchaser by a seller that a product is reliable and free from defects. The seller further undertakes that he will, without charge, repair or replace defective parts or replace the entire product if the product turns out to be defective within a given period. Certain specified conditions may have to be met before the warranty is enforceable.

Section 37 of the Act requires that merchants fulfil their warranty obligations. If a good does not come with a Written or Expressed Warranty, it is still covered by an Implied Warranty, unless the product is marked "as is" or the seller otherwise indicates in writing that no warranty is given.

One type of implied warranty is the "warranty as to merchantability". This means that the seller promises that the product is of a quality that will allow it to perform satisfactorily. For example, it is implied that when a merchant sells a car, it will run satisfactorily. Another type of implied warranty is the "warranty as to fitness for a particular purpose". This applies when a consumer buys a product on the seller's advice that it is suitable for a particular use. For example, a person who suggests that a particular type of paint be bought for a driveway warrants that the paint is suitable for outdoor use. Implied warranties have no specific period of coverage. Instead, coverage is based on an estimation of a reasonable time for which the product should last, provided there is no misuse.

"Bait and Switch" occurs when a merchant advertises at a bargain price, goods or services which he does not supply in reasonable quantities. The merchant lures the customer into the store by offering a product at an attractive price (the bait). On arrival, the customer is told that the product is sold out and is encouraged to buy another product at a higher price (the switch). Section 40 of the Act prohibits this practice.

The Act requires that products that are advertised be immediately available for purchase. If, for any unforeseen reason, a merchant cannot supply the products advertised, he should offer the customer similar products at the same price and publish an advisory or retraction of the advertisement in the media.

Sale above advertised price is the practice by which a product is advertised at a certain price and sold at a higher price. Merchants advertise a product at a particular price with the hope that consumers, already in the store, will pay the higher price rather than go elsewhere. Sale above advertised price is prohibited under Sections 37 and 41 of the Act.

This occurs when the seller charges the consumer the higher of two or more prices displayed in respect of a product. According to Section 39 of the Act, the products should be sold at the lowest prices displayed.

If, however, it is obvious that the lower price is an error, then the Fair Trading Commission may not require the merchant to charge that price. For example, if an item that is normally sold for $1000 is priced at $10.00, it would be considered to be a misprint and the merchant would be allowed to charge the higher price.